Caputo is working on a bid to increase the level of reserves

In August 2020, Pacific Investment Management Co. (Pimco) declared its withdrawal from buying bonds in Latin American currencies was coming to an end, having lost more money than ever before in its history. The investment firm was founded in Newport Beach, California, in 1971 by William H. Gross (who still runs it) and Mohamed A. El-Erian. In 2000, it was acquired by the German group Allianz, and has since operated under its wing, but as an independent fund. Its resume includes being one of the few investment funds to survive the 2008 crisis. This experience it was unable to repeat in Argentina, and which led it to later withdraw all its bets in the region, at least in local currencies.

The fund's main investment in the country was to acquire almost the entire Monetary Policy Bond (Bopomo), issued on July 21, 2017, by Luis "Toto" Caputo, then Minister of Finance of Mauricio Macri's government. It was the former official who personally deployed all his diplomacy to convince Pimco to be the principal investor in the issue. The transaction reached $118,433,743 million, paid a coupon based on the interest rate of the, at that time, Macri-version Central Bank Liquidity Bonds (Lenco de Liquidez), and would be settled quarterly on March, June, September, and December 21 of each year. It was a test by Caputo to begin attracting pesos in bulk from the market, gradually eliminating the Liquidity Bonds (Leliq), drying up the local currency market, and thus helping to lower inflation and pressure on the dollar.

In theory, Caputo's original strategy wasn't bad: launch local-currency bonds with two- to three-year terms, paying interest similar to monthly Leliq bonds, extending maturities to more than two years. In those pre-crisis times, the Executive branch seriously believed that by the second half of 2019, the Leliq snowball would be under control and could be renegotiated in the markets for long-term bonds. This assumed that that year, annualized inflation would be between 20% and 25% (or less), with Leliq rates below 40%, and with a dollar controlled by the fall in inflation and the country's resulting economic growth. Ultimately, confidence would lead to a growing demand for these bonds.

The reality of this flagship operation designed by Caputo was harsh. By June 2018, the Macri government was already negotiating a second version of the standby agreement signed with the International Monetary Fund (IMF), battling inflation that persisted in staying below 50%, and had to pay interest of more than 80%, a percentage it also lost due to devaluation. Pimco acquired 60% of the issue, losing fortunes estimated at nearly US$800 million toward the end of the Macri administration. Not to mention when the calculation was finally updated with the values ​​of the debt swap that culminated in October 2020, led by then-Economy Minister Martín Guzmán, during the Alberto Fernández administration. It was the last time a bond in pesos was designed to be purchased by someone bringing dollars into the country.

Now, Toto Caputo is seeking revenge. And he's making his riskiest move since taking office. The Central Bank of Argentina (BCRA) issued its Communication 8245 on Thursday—almost secretly, except for those interested and in the midst of the public presentation of the first phase of the whitewash—which explains the establishment of a minimum term for the repayment of negotiable bonds in foreign currency issued in the country by financial institutions. The measure is adopted within the framework of "prudential policies" and complements the measures adopted regarding negotiable bonds payable abroad, to discourage the use of short-term instruments. It also incorporates the option for non-resident investors to complete their transactions by subscribing to national Treasury debt securities directly in foreign currency. All of this is part of the scheme to ease the restriction on access to dollars for portfolio investment for non-residents, but with a six-month "parking" period.

Ultimately, what the Ministry of Economy has in mind is preparing the framework for the issuance of "peso-linked" bonds. That is, issuing debt in pesos, but with subscription in dollars, with non-residents as the target of demand. In other, less technical terms, debt is issued in pesos that guarantees a significant return equal to that of foreign currencies, but with the obligation to subscribe in dollars. Then, once the bond's useful life has expired, the pesos are returned, but in dollars. A placement similar to the one Pimco agreed to under the Caputo administration with Mauricio Macri as president. It is now assumed that this will be an alternative with better prospects and a future than the traumatic experience its Waterloo had with the Guzmán exchange.

What is Caputo seeking with this operation? To obtain the dollars he lacks to fulfill the commitment made with the IMF to increase the Central Bank's reserves by $4 billion, above the amount accumulated on April 14, the first business day of the new Extended Facilities agreement's validity. After the July 9 expiration of $4.5 billion in Bonares and Global Bonds, the bank will be more than $6 billion short of the target agreed upon with the organization headed by Kristalina Giorgieva.

In total, the commitment amounts to US$4.5 billion, but Caputo and his Finance Secretary, Pablo Quirno, have already secured some US$2 billion for this purpose, from a direct loan from international banks (one of them JP Morgan), which evidently maintain a friendly relationship with the country. This operation was announced on the afternoon of April 11th, at the same time that the minister was presenting the Extended Facilities agreement with the International Monetary Fund (IMF), along with other lines of credit from financial organizations such as the World Bank and the Inter-American Development Bank (IDB). It was also the day that the lifting of restrictions on the purchase of dollars by individuals was announced. It went unnoticed amidst these presentations, but Caputo showed his first hand, warming up the way the July 9th payment deadline would be paid, the most important payment the government has yet to execute before the end of 2025. And similar commitments could fall again in 2026.